On July 21, 2016, the Financial Industry Regulatory Authority (“FINRA”) issued Regulatory Notice 16-25 (“Notice 16-25” or the “Notice”), see http://www.finra.org/industry/notices/16-25, which prohibits member firms from including in contracts forum selection provisions that would restrict customers or associated persons from filing an arbitration claim before FINRA. FINRA warned that member firms using pre-dispute agreements contrary to this principle may be subject to disciplinary action.
Associated Person Disputes
The Notice expresses disapproval of pre-dispute forum selection provisions between member firms and associated persons. In doing so, FINRA rejects court precedent, including rulings of the Second Circuit Court of Appeals, holding that the requirements of Rule 13200 can be waived in a pre-dispute arbitration agreement. According to FINRA, these holdings rest on the incorrect assumption that the duty to arbitrate before FINRA and under FINRA rules is merely contractual and may be waived: “FINRA rules are not mere contracts that member firms and associated persons can modify.” As such, any attempt to override the requirements of Rule 13200 by selecting, on an exclusive basis, a private, non-FINRA forum in a pre-dispute agreement constitutes a violation of FINRA rules. If a member firm uses a pre-dispute agreement that permits use of an arbitration forum other than FINRA, the Notice recommends that the agreement include the following recommended language: “This agreement does not prohibit or restrict you from filing an arbitration claim in the FINRA arbitration forum as specified in FINRA rules.”
Many member firms employ pre-dispute arbitration agreements with both associated persons and customers. All such agreements must be reviewed promptly to ensure compliance with FINRA rules and Notice 16-25; namely, the forum selection provisions in these agreements must not restrict access to FINRA arbitration.